Why we think the recovery will be U-shaped?

Schroders
Simon Stevenson
Simon Stevenson
Schroders Deputy Head of Multi-Asset
0
We've gone from predicting a V-shaped recovery to a U-shape, given the difficulties of lifting lockdown.

We are downgrading our forecast for global growth once more to reflect the weakness seen in the first quarter. Overall we see global activity falling 5.4% this year, a downgrade from our previous forecast of -2.9% and mainly driven by downgrades to the US and China. We expect the recovery to be gradual as households and firms remain cautious.

In 2021, global growth should improve to 5.3%, based on fiscal and monetary policy remaining loose and, on the medical front, a vaccine being successfully developed by mid year.

We have also downgraded our global inflation forecast to 1.5% in 2020 (from 1.9% previously) and 1.8% in 2021 (previously 2.1%).

Are we past the worst yet?


On a global basis, activity in the second quarter is likely to be as bad if not more severe than in the first quarter, as the lockdowns extended through April and into May. However, some of the data suggests we are past the worst: for example, industrial metals prices have stabilised and Google mobility data suggests that activity in the workplace is picking up, albeit from a low level.
 

From here we should see activity improve as lockdowns eased toward the end of May and have been loosened further in June. As a result, Q3 should see something of a bounce in activity, albeit to a lesser extent than we had previously anticipated; we think the economy will fail to regain all the ground lost in the first half of the year.

Why is the rebound expected to be weaker compared to the last forecast?


We expect the rebound to be weaker compared to our previous forecast because of four broad factors:

  • Difficulties in lifting lockdowns: Specifically, the trade-off governments face between putting economies back to work and the health risks of exposing people to Covid-19. Many scientists warn of the danger of a second wave of infection.

  • Cautious consumers: The experience of the virus will make people more cautious in general. In some areas, spending habits will not return for some time such as in the travel, hospitality and leisure sectors.

  • Rollback in government support: Less support for business means further household uncertainty over future employment, adding to consumer reticence to spend.

  • Business investment to suffer: At the corporate level, the uncertainty over the outlook will weigh on investment, and following the sharp increase in debt, we would expect a period of deleveraging from firms as we go through 2021. This will weigh on real activity and incomes as firms prioritise debt reduction overspending on new equipment and technology or dividends.

All of this means we’ll not regain pre-Covid levels of activity by the end of 2021, making the forecast less of a V shape and more of a U.

How does the picture differ across regions?


US: Growth forecast cut to -8.2% for 2020 from -3.9% following a weaker-than-expected Q1 and a downgrade to our projection for the second half of the year.

Eurozone: Eurozone growth has been revised down to -6.1% from -5.7% for 2020 with the main change driven by the new information received from Q1 GDP data.

UK: GDP growth has been downgraded from -7.2% to -8.5% for 2020 for the same reason.

Japan: We expect the economy to contract by 5.4% in 2020 (faring better than most of its developed market counterparts) reflecting a lower scale of shutdown and strong government support.

Emerging markets: The biggest change to our emerging markets forecast is our outlook for China; we revise our Chinese growth forecast sharply lower for 2020 to 2.2% from 5%.

The rest of the BRIC economies (Brazil, Russia, India, China) also receive downgrades with the group no longer expected to experience growth of 1.8%, but a contraction of -2.2%. This is partly because they have had to impose longer-lasting lockdowns than we had previously anticipated and in part because globally we are now assuming a more protracted recovery, which has consequences for trade.

What other scenarios could we face?


We think the most likely risk to our central view is that we see a W-shaped recovery. This will result from the virus returning later in the year and lockdowns being re-imposed, creating a double-dip recession.

The V-shape recovery is the next most likely scenario. In this scenario, the virus remains subdued and the private sector responds more positively to the lifting of lockdowns, and government and central bank support.

That another eurozone debt crisis transpires is our third greatest risk. These scenarios all point to lower inflation than in the base case.

Lower probability scenarios include the L-shaped recovery (in which a much more severe increase in private sector caution keeps activity weak for longer) and an MMT (modern monetary theory)-fuelled fiscal expansion (in which governments print money and disburse it directly to the public to support economic growth).
 

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.


This is an article originally written by Keith Wade, Chief Economist, at Schroders.

Important Information:
This material has been issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders) for information purposes only. It is intended solely for professional investors and financial advisers and is not suitable for distribution to retail clients. The views and opinions contained herein are those of the authors as at the date of publication and are subject to change due to market and other conditions. Such views and opinions may not necessarily represent those expressed or reflected in other Schroders communications, strategies or funds. The information contained is general information only and does not take into account your objectives, financial situation or needs. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this material. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this material or any other person. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any references to securities, sectors, regions and/or countries are for illustrative purposes only. You should note that past performance is not a reliable indicator of future performance. Schroders may record and monitor telephone calls for security, training and compliance purposes.

Learn more
Established in 1961, Schroders in Australia is a wholly owned subsidiary of UK-listed Schroders plc. Based in Sydney, the business manages assets for institutional and wholesale clients across Australian equities, fixed income and multi-asset and global equities.

Schroders believes in the potential to gain a competitive advantage from in-house global research; that rigorous research will translate into superior investment performance. We believe that internal analysis of investment securities and markets is paramount when identifying attractive investment opportunities. Proprietary research provides a key foundation of our investment process and our world-wide network of analysts is one of the most comprehensive research resources dedicated to funds management.

Areas of expertise:
Australia equities
Fixed income
Multi-asset
Global equities

Why Schroders?

With a global network of researchers, we focus on serving our clients and targeting one result - superior investment performance.

Inherent in our approach to investment management is:
A structured, disciplined and repeatable investment process
A clearly defined investment style
A team approach to investment management

A global asset manager

We have responsibility for A$803.1 billion of assets* on behalf of institutional and retail investors, from around the world. Their assets are invested across equities, fixed income and alternatives.

We employ over 4700 people worldwide who operate from 41 offices in 30 different countries across Europe, the Americas, Asia and the Middle East.

We are close to the markets in which we invest and our clients.

Schroders has developed under stable ownership for over 200 years. Long-term thinking governs our approach to investing, building client relationships and growing our business.

*Source: All data as at 30 June 2018